It’s all about Change
Business and financial cycles always go longer and further than expected.
It has been seven years since the global financial crisis. Seven fat years for financial markets but seven lean years for the real economy.
There has never been such a big gap between Wall Street and Main Street. This gap is the cause for the increasingly divided societies in the West and the unpredictable political process everywhere in the world.
Change is coming
Like every cycle transition, the shoots of the new trend are still weak and only perceptible to the careful observers.
This business cycle has had one unique characteristic – the low productivity of labour across the world. Technological advances, super-flexible work practices, and general risk aversion after the post-Lehman shock have all contributed to lousy productivity.
Low output means low wages, low corporate profitability and low investment.
Confronted with persistently low growth, Central Banks around the world pumped unprecedented amount of money to revive the real economy. Unsurprisingly, most of it has not ended up there. Nobody in their right mind will invest when profits and cash flow are scarce.
But money, when unleashed, will always find a home. Nature abhors a vacuum.
Follow the Money
More than $12 trillion of money printing lifted paper assets around the developed world: bond and stock markets, real estate in the most desirable metropolises, private equity and venture capital. The owners of financial assets became the Have’s and the labourers in the real economy – the Have-Not’s.
The Haves became the “elites”, whose lives have never been better, almost utopian in the land of unicorns. The Have-Nots became the ones left behind, whose lives are increasingly dull and whose futures are dystopian.
Not many think that Brexit, Trump, the hipster movement, the crisis in Brasil and all sorts of modern conflicts might have been caused by quantitative easing. We suspect that the QE pill has had all those unpredictable and undesirable side effects.
But this might be all about to change.
Watch the signs
Here are some of the signs. Governments around the world, who were accused of causing the financial crisis, tightened belts for the seven lean years with limited success. No wonder the allegiance to the austerity dogma is waning. More and more voices talk about fiscal expansion to take over ineffective QE. Both US Presidential candidates are campaigning for “spend, spend, spend” while interest rates are low.
Where the US leads, the rest of the world will follow. A new mantra will reign supreme: productive investment by governments in infrastructure.
What would this all mean?
We think a reversal of the financial and business cycle that prevailed since 2009. What should you watch?
- Change in the behaviour in financial assets most sensitive to government policy and inflation. Over the last few weeks, bond prices – after more than a decade long run – have started to fall. Should inflationary expectations pick up, what started as a trickle, will become an avalanche.
- Continued upward move in Gold and Silver – the world’s inflation weathervanes. Gold is just over $1300/oz but used to be as high as $ 1,900 whereas Silver is c. $19 but peaked close to $50.
A reversal in financial conditions will not be immediate. It takes time for the narrative to change. But it will, as it has always. As inflationary expectations rise:
- There will be a rush to sell bonds
- The cost of debt will rise
- Equities, real estate, bond proxies will falter.
- A unicorn or two will implode.
The gap between Wall Street and Main street will start to close. After seven lean years on Main Street, we may have seven fatter ones with some consequences we can predict and others that will completely take us by surprise.
Make sure you read our next article telling you how to prepare for the reversal.
Go ahead, see what you have been missing.
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